Last month, research from Morningstar revealed the country’s two largest super funds, AustralianSuper and Australian Retirement Trust (ART), now command a quarter of the Australian Prudential Regulation Authority (APRA)-regulated market, collectively managing more than $620 billion in assets.
Moreover, the research revealed that after a wave of mergers, strong performance and high inflows, the mega fund club has expanded to include Aware Super, UniSuper, and Hostplus. Meanwhile, three additional funds – Cbus, Rest, and HESTA – are on the verge of joining this elite group.
This rapid consolidation and growth of the superannuation industry has attracted the attention of both international and local institutions, including the International Monetary Fund (IMF), which raised concerns this month about liquidity risks within Australia’s super system.
Specifically, citing concerns over the funds’ increasing exposure to illiquid investments and the substantial size of certain funds, the IMF warned that sudden liquidity demands could lead to rapid, synchronised asset sell-offs in domestic markets as funds scramble to raise cash.
Similarly, a month earlier, the Reserve Bank of Australia (RBA) flagged the growing importance of the country’s super sector to financial system stability due to both its size and its connections to banks.
Speaking on the matter to InvestorDaily this week, senior analyst at Morningstar, David Little, said “no doubt there are risks” given the growing number of assets that are split among a more concentrated number of funds.
“We obviously need to make sure that the funds are looking at their liquidity management appropriately and regularly, taking into account things like demographics,” Little said.
Reflecting on the IMF’s concerns regarding funds’ exposure to investments such as private equity and credit, Little said that while there is “quite a variance in unlisted exposure across the funds”, it needs to be closely monitored.
“During the GFC period, a couple of funds had issues with their unlisted exposures and breaching allocation limits, but I think funds have certainly tightened up their valuation processes to more regularly value their assets,” Little said.
Although he currently doesn’t see “too many issues” regarding funds’ ability to meet member redemptions, the analyst emphasised that there are still some concerns for financial regulators to monitor in the future.
“It’s difficult to say how much of a current issue it is, but obviously it would become more pronounced during a crisis. No doubt it’s something that needs to be monitored particularly as the mega funds continue to get bigger. There is always that continued chase between industry funds to continue to consolidate, build their economies of scale,” he noted.
According to the IMF’s data, nearly one-quarter of total assets in five major Australian super funds are tied up in illiquid investments.
While it acknowledged that Australian regulations mandate that funds manage liquidity to accommodate client switching, it said the rising proportion of illiquid assets heightens the potential for disruption, with similar trends being observed globally.
Earlier this year, Australia’s largest super fund wrote off a $1.1 billion investment in software company, Pluralsight, after the latter entered a restructure following a steep decline amid rising interest rates and growing market competition.
While AustralianSuper is well-diversified and, as such, didn’t face significant hurdles in absorbing this loss, Mark Delaney, the fund’s CIO, told in the Australian Financial Review Super & Wealth Summit this week, the loss “still burns”. However, the fund intends to continue to invest in private equity, venture capital and also the tech sector in general.
When the misstep involving AustralianSuper’s investment in Pluralsight became public, APRA’s deputy chair Margaret Cole said the interaction between private credit and super funds is “opaque”.
This opaqueness, she said, is a central driver for APRA moving towards cross-industry stress testing, to better explore any potential contagion sources and gaps in the regulatory framework.
